Cash flow to creditors is a financial metric that measures the net cash flow a company pays to its creditors (i.e. lenders and bondholders) during a given period. It is also known as cash flow to debt.
The cash flow to creditors is calculated by subtracting a company’s interest payments to its creditors from its operating cash flow. The resulting figure reflects the net cash flow paid to creditors during the period.
The formula for calculating cash flow to creditors is as follows:
Cash Flow to Creditors = Operating Cash Flow – Interest Paid to Creditors
Operating cash flow can be calculated using the indirect method, which starts with net income and adjusts for non-cash items such as depreciation and changes in working capital.
Interest paid to creditors includes any cash payments made to service a company’s debt, such as interest payments on loans or bonds.
A positive cash flow to creditors indicates that a company is generating more cash from its operations than it is paying in interest to its creditors. This is generally a positive sign, as it suggests that the company is able to service its debt and may be able to pay down its outstanding debt over time. A negative cash flow to creditors indicates that a company is paying more in interest to its creditors than it is generating from its operations, which may suggest that the company is facing financial difficulties or is taking on too much debt.